Corporate debt maturity and the real effects of the 2007 Credit
crisis

In corporate Debt Maturity and the Real Effects of the 2007 Credit
Crisis (NBER Working Paper No. 14990), co-authors Heitor Almeida,
Murillo Campello, Bruno Laranjeira and Scott Weisbenner measure the
effect of financial contracting on corporate outcomes following a shock
to the supply of credit - specifically the mortgage market crisis of
August 2007. They find that in the immediate aftermath of such a shock,
long-term financial contracts such as about-to-mature debt contracts can
have a sizeable effect on firms’ real and financial policies.

Financial distress

The authors use data compiled by Compustat, singling out over 1,000
robust firms capable of issuing long-term debt and avoiding comparisons
with weaker companies that would be shaken by a credit crunch in any
event.

They look particularly at the proportion of long-term debt that
matured right after August 2007 in order to asses how firms are affected
by credit contractions.

They match firms that they would expect to be more susceptible to
financial distress, those with debts coming due, with “control” firms
that they would expect to be less affected by a credit shock, namely
firms with debt that matures at a future date.

The researchers first document the existence of pronounced variation
in the maturity structure of long-term debt at the onset of the 2007
crisis, which stemmed from contracting decisions made several years
prior to that credit shock. That variation in long-term debt maturity is
persistent, with no sign of change in the years leading up to 2007.

After matching firms on numerous characteristics, the researchers are
also able to isolate firms with a large fraction of long-term debt
maturing right after the crisis (the treated firms) that are virtually
identical to other firms whose debt happens to mature in later years
(the control firms).

These groups of firms are identical across all of the characteristics
that the researchers consider except for debt maturity structure. For
example, the two groups of firms display similar investment rates in the
three quarters immediately leading up to the crisis (7.8 percent of
capital on a quarterly basis for the treatment group and 7.3 percent for
the control group).

For firms with long-term debt maturing just after the credit crisis,
quarterly investment rate decrease to an average 5.7 percent of capital,
a significant fall of 2.1 percent. In contrast, similar firms that did
not have debt maturing do not decrease their investment; indeed, their
quarterly investment-over-capital actually increases by 0.1 percent.

Long-term debt

Moreover, the relationship between the debt maturity structure and
investment strengthens when the researchers focus on firms for which
long-term debt is a more important source of financing; in that case,
the drop in investment is 3.4 percent. As expected, the relationship
disappears when they use firms with insignificant amounts of long-term
debt.

The relationship between debt maturity structure and investment holds
only for the period surrounding the recent financial crisis. Replicating
their central tests, which involved data from 2007, for each year
between 2000 and 2006, they find no relationship between debt maturity
structure and investment.

Novel link

The only year in which investment rates differ for firms with and
without substantial amounts of long-term debt maturing is at the end of
2007.

This suggests that the negative effect of debt maturity on investment
is indeed attributable to firms’ inability to refinance the maturing
portion of their long-term debt in the one period in recent years that
experienced a pronounced credit squeeze.

The authors conclude that their unique, quasi-experimental
methodology reveals a novel link between debt maturity structure and
corporate investment. In particular, their analysis points to the
importance of debt maturity structure in affecting corporate financial
flexibility.

Their results also provide evidence that the 2007 credit crisis had
real effects on corporate behaviour and underscore that debt maturity
structure is an important variable in understanding how credit supply
shocks spread through the corporate sector.